In case you leave the UK and, during your stay abroad, generate certain income or gains, you may be obliged to pay taxes on this income or gains if the following two conditions are cumulatively met: (i) you return to the UK within a time period of 5 years commencing on the date of your departure; (ii) you were a UK resident for at least 4 of the last 7 tax years before you moved abroad. The rules above are also known as temporary non-residence rules. Capital gains and losses realized by those who are temporary non-residents can be used to reduce gains of the same year, but they cannot be carried forward.
Although gains triggered on assets acquired during the period of non-residence are generally excluded from UK taxation, specific exceptions from this general rule apply. Those exceptions relate to assets acquired after departure from the UK, which is somehow connected with the previous residence period. Such gains are treated as chargeable in the applicable tax year return.
Also, capital gains that were held over or rolled over are clawed back if the recipient of the asset leaves the UK within a time period of six years, commencing immediately after the end of the tax year when the asset was disposed.
The UK tax authorities provide the following example of how the retrospective taxation of temporary non-residents works. Mr Smith lived his entire life in the UK, but left his homeland on the 25th of March 2016 to start employment abroad. He returned back to the UK on the 2nd of February 2021. On the 15th of September 2016, Mr Smith realized a chargeable gain on an asset he bought before he departed from the UK. The amount of the chargeable gain was GBP 35,000. Since (i) Mr Smith returned to the UK after less than 5 years from his departure and (ii) he stayed in the UK for at least 4 out of the 7 tax years immediately before his departure, Mr Smith will be subject to tax on the capital as mentioned earlier gain of GBP 35,000.
Income that may be subject to retrospective taxes
As mentioned above, gains may be subject to retrospective taxes and certain types of income. These types include, without limitation:
- (i) certain lump sums paid under employer-financed retirement benefit schemes;
- (ii) gains from a life annuity, life insurance, or capital redemption policies;
- (iii) distributions paid by close companies of which the taxpayer is an associate or a material participator;
- (iv) offshore income gains (subject to certain exceptions);
- (v) foreign income that is chargeable on a remittance basis of assessment and is remitted to the UK in the temporary non-residence period;
- (vi) certain lump sums paid by UK pension schemes;
- (vii) loans to participators of close companies that are written off or released but are not taxable at that time due to the terms of a double tax treaty; and
- (viii) withdrawals from the so-called flexible pension funds.
Avoid the UK retrospective taxes
If you would like to avoid the UK retrospective taxes, you need to make sure you do not return to the UK within a time period of five years commencing on the date of your departure. Therefore, it is necessary to plan your visit abroad well. If you would like to visit UK a few times during the five years after you departure, you need to ensure that you have evidence proving that your visits were short and, during the time of those visits, you were a resident of another country.
Suppose you plan to return to the UK after the expiration of a time period of five years. In that case, you may consider disposing of your assets during the time when you are a non-resident (but not a temporary non-resident). Such a disposal may be beneficial if it will be subject to capital gains taxes which are lower than the UK capital gains taxes.
Thus, you will “free” the gains from those assets from the UK tax jurisdiction. However, please note that the disposition of certain UK assets is subject to capital gains taxes even if non-residents make it. For instance, disposals of UK residential property by non-resident individuals or companies are taxable at the highest rate of capital gains tax, irrespective of the owner’s residence.